Rate of Return
Fri, 18 Aug 2000, 1:27pm EDT
Sonera Fight May Bruise European Bond Holders: Rates of Return
By Alice James
London, Aug. 17 (Bloomberg) -- Whoever wins the fight for Sonera Oyj, Finland's largest mobile phone company, is likely to see its bonds suffer, making it harder to sell more debt to help pay the bill of at least $28 billion, analysts said.
European phone companies are already committed to paying $116 billion for high-speed cellular licenses, including $46 billion in Germany's auction, which ended today. They've also borrowed record amounts to pay for acquisitions this year, including Vodafone Group Plc's $186 billion takeover of Mannesmann AG, the second- largest merger ever.
Sonera's buyer will struggle ``especially given it is likely to be someone with a pan-European strategy who will be bidding for licenses anyway,'' said Stephen Holmes, who helps oversee 89.3 billion pounds ($134 billion) at Fleming Investment Management. ``I'm still not buying investment-grade telecom bonds.''
Finland's government won parliamentary approval to sell its 53 percent stake in Sonera, and analysts say it will want at least 65 percent cash, some $9.6 billion, based on the company's market value.
Telefonica SA, Spain's largest telecommunications company, said it's considering bidding, while Deutsche Telekom AG, Vodafone, British Telecommunications Plc, Royal KPN NV and Orange Plc are among the other potential buyers suggested by newspapers including the Financial Times.
Those companies already owe bondholders more than $105 billion, according to Bloomberg calculations, and whichever succeeds will also end up with Sonera's $2 billion of outstanding debt. Deutsche Telekom, British Telecom and Vodafone were among the winners in Germany's license auction. Sonera and Telefonica were partners in one of the winning bids.
License fees many times greater than governments originally expected have damaged outstanding debt. The 500 million euros of seven-year bonds Telefonica sold in March yield 112 basis points more than bunds, double the yield spread when they were issued. They've lost 1.2 percent, while bunds have returned 1.3 percent over the same period, according to Bloomberg calculations.
Simon Ballard, a market strategist at Bear, Stearns International, recommends ``caution towards spreads on telecom bonds'' as supply booms. Sonera's price tag ``could be too rich.'' Speculation that Sonera could soon be bought ``underlines the current trend in the European telecom industry for continued restructuring and consolidation.''
Deutsche Telekom is already paying $50.5 billion for VoiceStream Wireless Corp. of the U.S., a price that values each client at $24,217. That's more than seven times the $3,392 Vodafone paid for each U.S. customer when it bought AirTouch Communications last year, and 3.6 times what France Telecom is paying for each of Orange's subscribers.
Companies have funded their takeovers by refinancing initial bank loans through the corporate bond market. That's the route Vodafone followed when it bought Mannesmann. BT and Telefonica plan to sell bonds later this year to pay off loans.
Phone companies in Europe borrowed $122.5 billion from banks during the first half, according to Thomson Financial Securities Data, more than double the amount raised during the year-earlier period.
Sonera won't come cheap -- its shares trade at 80 times estimated earnings, while Deutsche Telekom and many other former monopolies trade below 60. A $28 billion invoice would value each of each of its 2.24 million mobile subscribers at about $12,500.
Things could be worse, though -- one consolation for bond holders is that buying Sonera may cost a lot less than it would have earlier this year. The company's shares have halved since concern over license costs first surfaced. The shares currently fetch 44.05 euros, down from as much as 95.49 euros in March.
Shares of other phone companies are tumbling too, though. All of the other successful bidders in the German license auction have declined as the costs of Europe's permits climbed.
On a six-month basis, Vodafone has dropped 14 percent, Telefonica is down 16 percent, France Telecom has slid 17 percent, British Telecom has declined 18 percent, KPN fell 37 percent, and Deutsche Telekom has tumbled 48 percent.
Europe's telecommunications shares have lost 17 percent this year, making them the second worst performing group in Europe according to Dow Jones Stoxx rankings.
Companies are paying so much for the rights to frequencies that they will struggle recoup their spending, some investors said.
``They are not just borrowing to buy licenses and acquisitions -- they need to install state-of-the-art technology'' to use those licenses, and also to keep current customers and tempt more, said Fleming's Holmes.
``The more expensive these licences get, the harder it will be to make money out of them. The big risk is that they spend billions on it and not enough people use it.''